Interview with Stefan Stoyanov, Head of M&A Database at EMIS

EUR 71.5BN
Value of M&A transitions in 2017 in Emerging Europe

How would you describe 2017 in terms of M&A activity in emerging Europe?

In a year marked by uncertainties surrounding Brexit’s unwinding and the policy direction of the new US administration, as well as by fears of spreading populism that preceded the elections in the Netherlands, France and Germany, M&A activity across emerging countries in CEE/SEE has remained healthy. Deal flow was in fact higher than in 2016, reaching 2,113 transactions at year-end, although the total value of M&A fell by 17% to EUR 71.5bn due to fewer deals above the EUR 1bn threshold. The median size of deals, based on EMIS data on 1,308 transactions with disclosed or estimated values, has surprisingly remained unchanged at exactly EUR 11.2m.

What are the main trends you observed?

Among the big trends we observed in 2017, the most obvious was that of China gradually becoming a major factor for inbound deals in CEE/SEE. Last year the Asian country ranked as the region’s top foreign investor for the first time ever, despite having to curb its record 2016 global buying spree by nearly 40% due to regulatory and leverage concerns. It should be noted, however, that China landed the top investor spot thanks to a single exceptionally large deal - CEFC’s purchase of a EUR 7.5bn stake in Russian oil major Rosneft. Nevertheless, Chinese buyouts in 2017 were more pronounced than previously, featuring mixed buyers, as well as stronger country and sector diversification. China’s increased interest towards CEE/SEE likely stems from the availability of more easily approachable targets than in the U.S. or in Western Europe, and a lighter regulatory environment. We expect this interest to grow further in 2018. While the real estate sector still leads by number of deals, the booming IT scene is turning into a significant driving force for M&A.

China was the top foreign investor in CEE/SEE in 2017.

The volume of IT-related transactions increased by 15% last year, reaching 305 deals. A lot of the sector growth could perhaps be attributed to various EU funding mechanisms being in place across the CEE/SEE countries. Nevertheless, deals with foreign private equity participation in the EUR 20-50m range, which used to be sporadic once, are becoming more common. Lastly, prolonged access to cheap funding within the Eurozone combined with dormant cash in the hands of both financial and strategic investors have boosted demand for acquisitions and resulted in the formation of a predominantly sellers’ market. The sellers’ advantageous position was evident in our observations of the newly announced deal intentions in 2017, as well as in the median valuations - while in 2016 EV/ EBITDA was in the 6.5x-7x range, last year the range extended to 7.5x-9x, signalling the sellers’ stronger bargaining position and their “shopping” for top bids. In addition, sector players have confirmed an increasing amount of “locked box” deals, which shift certain transaction risks in favour of the owner.

EMERGING EUROPE M&A DEALS 2017 IN NUMBERS

Rollover the images to reveal the numbers of deals

TOTAL M&A
TRANSACTIONS

2,113

deals

DEALS IN THE

IT SECTOR

305

deals

DEALS IN THE

FINANCIAL SECTOR

161

deals

Hungarian OTP bought Romania’s Banca Romaneasca and Serbian Vojvodjanska Banka in 2017, and is eyeing a further 2-3 deals by 2019.

What about transaction activity in the banking sector – you had predicted increased activity for 2017?

Despite our earlier predictions for a more active banking M&A in 2017, the year was somewhat quiet. Deals in the financial sector were 161 (16% down from 2016) for a total value of EUR 3.5bn. The stabilizing European economy and booming mortgage lending in Hungary, the Czech Republic, Romania and Bulgaria have postponed the pressing need for mergers in the sector. Nevertheless, the near-zero interest environment is still supressing profits and efficiencies of scale are being sought by active players in the region, such as Belgium’s KBC and Hungary’s OTP. The latter, said to have prepared a war chest of some EUR 1bn, already bought Romania’s Banca Romaneasca and Vojvodjanska Banka in Serbia in summer, and is eyeing a further 2-3 deals by 2019. KBC on the other hand, after acquiring UBB in Bulgaria in late 2016, is now also seeking opportunities in Slovakia. On the Polish scene, after the IPO of Raiffeisen’s local unit was again delayed, the only major banking deal that happened was the sale of part of the business of Deutsche Bank to local lender BZ WBK (owned by Spain’s Santander) for over EUR 300m. More deals in the region will surely come in 2018, although improving economies and the expected easing of ECB’s bond buying programme could pose a hurdle to sector M&A.